Not the “Death of the Dollar” but “Death of the Euro?”

The rise of the Chinese yuan as an international currency is not only unstoppable but is advancing in leaps and bounds, according to SWIFT. It comes at the expense of other currencies, though it’s not triggering the long-awaited “death of the dollar.” On the contrary. Yet the euro has stumbled into the line of fire.

SWIFT is in a position to know. The member-owned organization, based in Belgium, provides among other things a network that enables financial institutions around the globe to send and receive information about financial transactions in a standardized environment. It also cooperates with various intelligence and law enforcement agencies around the world, including the US Treasury, the CIA, and others. The NSA is likely to get what it wants without asking.

In its latest RMB Tracker, SWIFT is relentlessly effusive about the rise of the yuan. In August, global payments in renminbi rose once again, achieving another milestone: it edged out the yen to become the fourth largest payments currency with a share of, well, 2.8% of global payments – “reflecting RMB’s huge potential and staggering momentum as a major currency,” the report gushes.

That’s not exactly a lot, compared to China’s economic power in the global markets. When China sneezes, as it just did, the world catches pneumonia. But it’s a big leap forward: In August 2012, the yuan was in 12th position, with a minuscule share of 0.8%.

In the Asia-Pacific region, the yuan is already the most actively used currency for intra-regional payments with China and Hong Kong, having edged out the yen this year.

Becoming a major global currency is one of the preconditions for becoming a reserve currency held by central banks as part of their foreign exchange reserves baskets. But the yuan isn’t in those baskets yet.

In Q1 2015, the composition of official foreign exchange reserves put the dollar at 64.1%, up from its recent low of 61% in 2013, but down from 71% the 1990s before the euro showed up. The euro dropped to 20.7% in Q1, down from its peak in 2009 of 27.6%. It was supposed to reach parity with the dollar. But the debt crisis exposed what it was made of, and the world got cold feet. Meanwhile, the yen rose to 4.2% of official foreign exchange reserves, the highest since 2002 [read… World Holds Breath, Waits for “Death of the Dollar”].

To get into these reserve baskets, the yuan must grow into one of the largest payments currencies. And by edging out the yen, it proves that it has arrived.

But the yuan’s advance as a payments currency didn’t come out of the dollar’s hide. On the contrary. In August, the dollar’s share of global payments rose to 44.8%, from 43.6% in July, and from 38.8% in January 2014.

It came out of the euro’s hide: its share fell to 27.2% in August from 28.5% in July, from 33.5% in January 2014, and from 40.2% in January 2013.

The British pound also keeps losing traction, slipping to 8.5% in August, from 8.7% in July, and from 9.4% in January 2014. It’s still light years ahead of the next in line, the yuan’s 2.79% share and the yen’s 2.76% share.

Much of the action remains in Hong Kong, the world’s largest off-shore RMB center, processing 70.4% of all RMB payments. But the internationalization is progressing. China is going around the world appointing Official RMB Clearing Banks in the financial centers of Asia and Europe, Africa (Johannesburg, since July 2015), Australia, Chile, and Canada (Toronto, November 2014). And the major country that doesn’t have one?

The US.

But there are banks in the US that process RMB payments. They’re just not Official RMB Clearing Banks. For example, last November, China’s Industrial and Commercial Bank inked a deal with the increasingly impatient Los Angeles city government to set up an offshore renminbi center; for better or worse, China and California are joined at the hip.

In total, 1,700 banks in more than 100 countries used the RMB for payments. Of them, 1,134 banks – nearly half of them in Asia – used it for payments with China and Hong Kong; and another 600 banks used it for payments with no leg of the transaction in Hong Kong or China!

In terms of transactions sent and received by value, excluding China and Hong Kong, the UK reigns with a share of 53.1%. Is it the UK’s trading prowess, gigantic market for Chinese merchandise, or unspeakably large exports to China? Nope. It’s the City of London, center for global foreign exchange trading and rigging.

The US, China’s largest market, is in second place, with an 11.9% share. Tiny Singapore is in third place with a 7.7% share, testament to its role as a financial center in Asia. France and Japan follow with a share of 6.8% and 3.5% respectively.

The yuan is also making headway in the global issuance of Letters of Credit sent and received by value with the rest of the world, rising to a year-to-date share of 9.1%. But wait… the dollar has a share of 80.1%. All the other currencies combined, including the euro, tussle over the remaining 10.8%. They barely matter.

This may be a harbinger: The yuan won’t dent the “dollar hegemony” for a while. But it will become one of top three payments currencies and reserve currencies. Its gains come out of the hide of other currencies, particularly the euro that has spent the last seven years squandering the global confidence its designers had labored to inflate over the prior years, and whose importance on the global scene continues to spiral down.

28 comments for “Not the “Death of the Dollar” but “Death of the Euro?””

Wow, Wolf. Amazing. It’s interesting to see how the tactics mirror warfare. Don’t mount a frontal assault on the “enemy” who is strong. But attack the weak spots. Is this case, the Euro. And the battles continue until they are all defeated, putting the attacker in a stronger position over time.

rich black

Oct 6, 2015 at 9:42 pm

I was at a commercial real estate presentation given by NAR economist Lawrence Yun this morning. In reference to the strength of the dollar, he came up with that tired old metaphor of the US dollar being the “least dirty shirt in the laundry”. He allowed questions at the end of his fairly standard panglossian presentation, and made the mistake of calling on me. After hearing me out, he said he could not address my question in front of that packed house, because it was “too deep”. When the crowd had thinned out, after the presentation, I ambushed him with another question, and he turned beet red after I challenged his pat answer. He retreated and said he would have to think more about my challenge.

So now that the Chinese are dumping US Treasuries, where are the members of the Chinese moneyed class investing their bucks for safe keeping? In assets like higher end houses in the US, vineyards in France, and in mineral mines and real estate in Australia, but not in Chinese real estate or Chinese stock. In other words, they are trading their yuan for assets that generate cash in other currencies.

Mr Reality

Oct 6, 2015 at 10:24 pm

“they are trading their yuan for assets that generate cash in other currencies.”

And that tells us all we need to know. Get your money out before the hard landing really takes hold.

Mr R

Bixem

Oct 6, 2015 at 11:28 pm

“In other words, they are trading their yuan for assets that generate cash in other currencies.”

You think that they buy all above assets by yuan, sir?
No, They brought them by US DOLLAR. They didn’t move yuan for these, they really moved bubbles inside China to outside. Safe heaven like Japan at early 90s, it end really bad.

I read that the Chinese government limits the amount of yuan that can leave the the country to 50,000. The Chinese funnel their money through Macau the get it out of the country to buy property elsewhere.

CrazyCooter

Oct 6, 2015 at 10:17 pm

CHS (Charles Hugh Smith – OfTwoMinds) has the best rebuttal I have seen about the Yuan as a reserve currency contender. In short, to be the reserve currency one must export debt to the global system to facilitate clearing, trade, and financing. This is how it has to work in a fiat/debt based global money system. If the Chinese are not transitioning to a consumer society and taking on/expanding debt, it isn’t possible for the yuan to ascend to a major reserve currency.

Right now they are a creditor to the world, not a debtor. Can’t happen. To be clear, the US was a creditor to the world when Europe was rebuilding from WWI … how did that work out for us, hmmm?

If one gets their mind around that, then it becomes clear what happens when the dollar (or the euro or the pound) stop expanding and start contracting – which is inevitable even at ZIRP.

We are faced with a staggeringly terrifying collapse in global trade, due to lack of liquidity, of which the likes the world has never seen. It will take some years yet, but I am not sure how businesses operate globally with wild currency swings and contracting money supplies.

And hyper-inflation doesn’t solve that problem. What does is asset backed money (not saying its gold – could be any asset such as oil or agri), which will phase in as trade partners avoid currency risks. Tough times ahead.

The euro is the number 2 reserve currency, as I pointed out in the article. The Eurozone has a large trade surplus with the rest of the world, like China does.

And most countries, including China, run budget deficits and generate public debt. So there is no difference in that respect between China and the Eurozone.

Which debunks these theories that a country with a reserve currency must run trade deficits and export its debt…. It’s just not the case in the real world.

The yuan can be a reserve currency just like the euro already is or like all the other reserve currencies, the GBP, JPY, CAD…

Nick

Oct 7, 2015 at 6:34 am

Free trade is a big part of the solution to lower seemingly insurmountable barriers. See TPP, the global trade revolution continues. Gold will still be worthless a generation from now.

Mark

Oct 7, 2015 at 12:21 pm

Your comment about gold is spot on. I had always seen it as “just metal” pretty much useless for anything, but jewelry.

d'Cynic

Oct 8, 2015 at 11:04 am

Gold was to become the only payment just a few years back, and given the current trajectory, likely in the not too distant future. I could go on explaining, but instead point to the excellent documentary, Inside the Meltdown: http://www.pbs.org/wgbh/pages/frontline/meltdown/etc/script.html.
Hopefully, reading through it, it is easy to discern the implications.
Trade agreements do not make the system more resilient, quite the opposite.

Martin

Oct 7, 2015 at 7:59 am

The Eurozone had until very recently current acount deficits. The international net investment position of the Eurozone might still be slightly negative. And the recent large current account surpluses wouldn’t have been possible, if the Euro wouldn’t have been massively sold by international central banks (because without this selling, the Euro would have been much stronger).
Of course to some degree one can sell debt and buy assets and perhaps the Chinese are doing this, but to be successful with this, they would in the medium term have to be a major banking center for the rest of the world. I strongly doubt this will happen. As was mentioned before, you can not even freely move Yuan. A lot of Chinese companies have Dollar debt, even those, that are not really operating world wide. How many Eurozone companies, that are mainly active in Europe have non-Euro debt, or UK companies with non-pound debt…

And the broader (for our discussion more important) balance of payments was negative only in 06, 08, and 09. The rest of the time it was a surplus.

Remember that export powerhouse Germany is in it. When the DM still existed, it too was a reserve currency, and Germany always has current account surpluses.

And the US had a surplus in its trade balance for much of the time until the 1980s – and throughout that time, the dollar was the dominant reserve currency. So the idea that a reserve currency requires that its country has a deficit in its current accounts simply doesn’t hold up.

But I agree with part of your message – that China is in a different ballpark and that it has all kinds of issues the eurozone doesn’t have, including free trading of the yuan. But this is what the article touched on: the moves and headway China is making to get there, and it’s getting closer. In terms of use as payments currency, the yuan is already there. But there remain, as you pointed out, plenty of other issues.

Tim

Oct 7, 2015 at 5:43 pm

Could reserve currency status possibly have something to do with the desirability of a country’s bonds? (Which has nothing to do with trade surplus/deficit issues, nor gov surplus/deficit issues.) Some people want super safe liquid assets. Does China have the kind of sovereign bonds that people want? When it does then I’m guessing the renminbi will have strong reserve currency status.

What’s the size of the Chinese sovereign bond market?

(and side comment about the ‘gold’ comments from others, Gold does form part of central bank reserves, so it ain’t quite worthless yet.)

Jonathan Vause

Oct 7, 2015 at 7:08 am

the last part of this might be a bit ott, but the first part is spot on. to become a reserve currency, the government/central bank must allow it to be fully convertible and tradable – that’s why the UK pound is still up there, and why the RMB won’t be, for the foreseeable future, at least. Michael Pettis has comprehensively nailed this one on his blog. and the euro is a failed experiment awaiting it’s inevitable denouement, of course

MC

Oct 7, 2015 at 3:13 am

Great piece, as always Mr Richter.
Thank you very much: these are things the European press is sweeping under the rug together with unemployment figures, German industrial orders and the US probe into diesel cars… that rug looks like a small hill right now, better be careful around it!

One thought that struck me: could this be yet another case of “second least dirty sheet in the laundry”? The PBOC has never made a mystery the yuan is pegged first and foremost to the US dollar. The euro and the yen are secondary pegging factors at very best. This peg ensures the yuan is only slight worse than the US dollar which at the moment looks like a brand new shirt compared to the euro and especially the yen.
With dollar liquidity drying up, especially on emerging markets, and the yen and the euro being what they are wouldn’t make sense if payments were conducted in yuan to make up for that lack of liquidity and/or allowing firms and (very wealthy) individuals to hoard precious US dollars?

Paulo

Oct 7, 2015 at 7:39 am

It is all very well to look at the strength of a country’s currency.

And this following statement says so much: “So now that the Chinese are dumping US Treasuries, where are the members of the Chinese moneyed class investing their bucks for safe keeping? In assets like higher end houses in the US, vineyards in France, and in mineral mines and real estate in Australia, but not in Chinese real estate or Chinese stock. In other words, they are trading their yuan for assets that generate cash in other currencies.” (Forgot Canadian properties mostly sitting idle driving our insane housing bubble)

The bottom line is China is overcrowded, beyond polluted, and corrupt (serving the political aristocracy at the expense of the commoner). It is always on the verge of upheavel….in short a basket case overflowing with problems that used to make stuff for everyone else by undercutting costs at the expense of everything people call ‘quality of life’. And now even many of those jobs are flowing downhill to poorer countries.

Doesn’t look like a rising star to me, despite what their currency does.

Seems to me it should be #2 or #3 in reserve currency status. If it becomes #1 we will know just how bad things have become for all of us if currency strength is based on realistic criteria.

Roddy6667

Oct 7, 2015 at 8:38 am

If you spend time inside China and you have connections with real people here, not just foreigners writing doom-and-gloom articles, you will realize that the idea of China being on the verge of an upheaval is just an American wet dream. Things have been improving for all classes for a long time. A few rich people moved some of their money offshore, but it’s not an exodus. The government’s program to clean up the air has made a noticeable improvement this year. China critics are too young to remember America in the Fifties and Sixties when the air and rivers were very polluted.
I live in China now and visit the US about once a year. I see a nation on the verge of upheaval when I walk outside JFK Airport. Police everywhere, no personal freedom, a declining economy. You won’t notice it if you don’t travel.

It could be the real answer is in between. However, concerning money fleeing China, you should not poo-poo that because it is real. 80% of homes for sale are sold to Chinese buyers. In fact, all up and down the west coast, the Chinese are buying property.

This is the same formula followed by Japanese buyers in the late 80s before their economy completely tanked – their timing could be worse (New York City realestate cratered shortly after that – if my meory serves me correctly). Does this mean the Chinese economy is about to tank? Maybe not, but never rule anything out.

I’ve traveled the world, too. South Korea last year for a year, Thailand, Germany, UK,etc. And when I come home I don’t see what you see. That doesn’t mean things are better. But they aren’t worse….yet.

Sorry, I missed something. 80% of realestate in Irvine CA are to Chinese buyers.

rich black

Oct 7, 2015 at 10:45 am

“A few rich people moved some of their money offshore, but it’s not an exodus”

Perhaps you haven’t met that many rich Chinese, because this sounds like an exodus.

Wall Street Journal:

“A survey by the Shanghai research firm Hurun Report shows that 64% of China’s rich—defined as those with assets of more than $1.6 million—are either emigrating or planning to.”

Remember, there are more than a million millionaires in China. If the richest Chinese want to leave, and take their wealth with them, that’s a serious exodus, even in a land of 1.4 billion people. The 400 WEALTHIEST AMERICANS = 62% OF WEALTH IN AMERICA. Imagine if they left this country (with a population of 310 million people), there would be an economic exodus that would gut what’s left of the US economy.

Roddy6667

Oct 8, 2015 at 7:02 am

This is an opinion, voiced by an organization that may have an agenda to promote. Are there reputable organizations that can back up these numbers? The Hurun Report is put out by Rupert Hoogewerf, who uses the alias Hu run. He is a former Arthur Anderson crony. He is not Chinese.
I know a lot of wealthy Chinese. I am a retired American living in China. I am related by marriage to a family that is successful in garment exporting and construction. Most of them were self made millionaires before they were 30. I don’t see any of them or their friends or business associates leaving. Some buy a house in America as an investment. Others send their kids to prestigious American colleges. None have plans of leaving. It is easier to start and run a company and get rich in China than America.

March 6 (Bloomberg) — China spent more on its internal police force than on its armed forces in 2010, and plans to do the same this year, as the government deployed security forces around the country to control growing social unrest.

The surge in public security spending comes as so-called mass incidents, everything from strikes to riots and demonstrations, are on the rise. There were at least 180,000 such incidents in 2010, twice as many as in 2006, Sun Liping, a professor of sociology at Beijing’s Tsinghua University, said in a Feb. 25 article in the Economic Observer.

——-

With the set-up for their next crash and that of the entire world, they’ll get back to those levels of unrest and more.

Nick

Oct 7, 2015 at 6:12 pm

We all know how this movie ends.

Petunia

Oct 7, 2015 at 10:27 am

The Yuan will keep expanding because the Chinese make stuff people around the world want to buy, and we in the US don’t. I read on this blog that Argentina has a huge swap deal with them. That deal will translate into refrigerators, washers & dryers, and all sorts of other stuff Argentinians will be buying from them and not from others. These swap deals will continue to grow in size and with other countries because the Chinese do not involve themselves in the internal affairs of other countries. They just transact at arms length.

The other issue that is feeding the move towards the Yuan is the American push into digital currency. When America goes digital, all the underground economies will transact in whatever else is around. I am pretty confident that stuffing a suitcase full of Yuan and taking it out of China is not a problem.

Nick

Oct 7, 2015 at 10:51 am

What worked in China’s favor was their vast economic expansionism of the last 10 years, which allowed them to under-price their exports compared to everyone else. The tables are turning, there are cheaper, better, more reliable suppliers out there.

As for stuffing a suitcase full of Yuan, no one would do that, they’d turn it into dollars on the black market first.

Petunia

Oct 7, 2015 at 12:45 pm

If America goes digital the US dollar will disappear. In the absence of physical currency any other physical currency that can be turned into usable stuff anywhere will gain acceptance.

rich black

Oct 7, 2015 at 12:40 pm

Wall Street Journal:

Oct. 7, 2015

Central banks around the world are selling U.S. government bonds at the fastest pace on record, the most dramatic shift in the $12.8 trillion Treasury market since the financial crisis.

Sales by China, Russia, Brazil and Taiwan are the latest sign of an emerging-markets slowdown that is threatening to spill over into the U.S. economy. Previously, all four were large purchasers of U.S. debt.

Michael

Oct 7, 2015 at 2:03 pm

Despite the emerging nations selling all treasury issues having no problem selling.

Regarding the elimination of the physical dollar, not going to happen. The US government is in the illicit drug business despite the war of drugs and that activity needs cold hard cash.

Its interesting to note whenever the US government declares a “war’ on something, the something never seems to get better.